WASHINGTON—The White House and Republican lawmakers were close to an agreement on a broad tax package that would extend the Bush-era rate cuts, reduce worker payroll taxes for one year and give more favorable treatment to new business investments.
Other possible elements of the still-developing deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed and temporary tax breaks for students and working families.
The outcome of the negotiations is vital, because the current tax levels signed into law by President George W. Bush expire on Dec. 31. Unless Congress acts beforehand, tax rates on virtually all Americans who pay income taxes will rise on Jan. 1. That could affect economic growth and even holiday sales.
Congressional Republicans are pressing their advantage in the negotiations as the clock ticks down. In a statement, House Republican Whip Eric Cantor said, "No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again."
But many details remain under discussion, and the deal must pass muster with sufficient numbers of Democrats to win passage in the House and Senate. Democrats didn't agree to the deal during meetings at the White House on Monday with President Barack Obama and Vice President Joe Biden, according to a House aide. "There are going to be a lot of unhappy Democrats with this deal,'' said a Senate Democratic aide.
The White House put forward the proposals for the temporary, two-percentage-point cut in Social Security taxes for workers and the greater deductions for business equipment purchases. Republican aides say GOP leaders appear warm to those ideas. But Democratic aides said Monday afternoon that some Democrats were uncomfortable with several elements of the plan, particularly the estate-tax rate and the payroll-tax reduction.
Unless changed, the estate tax, now lapsed for one year as part of the Bush tax breaks, is set to spring back next year to 55%. Under the plan discussed by the White House and congressional Republicans, the levy would be set at 35% for two years and would apply only to estates over $5 million, said people familiar with the talks.
A program of extended benefits for the long-term unemployed, which lapsed last month, would be revived for 13 months, said people familiar with the talks. The jobless benefits would financed by federal borrowing rather than by spending cuts.
Reaching a deal with the GOP on taxes could help Mr. Obama score points with moderates and independents, an increasingly important constituency, by underscoring his ability to work with newly empowered Republicans. But the discussions are angering some liberal groups who say Democrats should engage the GOP in a showdown, even if it risks letting the tax cuts expire for all income levels. In an email to its members, the liberal Moveon.org said, "They've given up on this critical issue without a fight."
Versions of a payroll tax cut have been considered before, and they enjoy a measure of support in Congress. But some Democrats are wary of any change to the payroll tax, which funds the Social Security program.
European Pressphoto Agency
President Barack Obama announced a bipartisan deal to extend expiring tax cuts for two years and to extend unemployment benefits on Monday.
The version of a payroll-tax holiday under discussion now would reduce the 6.2% Social Security tax levied on a worker's wages to 4.2%. A worker making $40,000 a year would save $800, and some economists say that could help stimulate demand at a time when it's remained relatively weak.
The employer's half of the tax—also 6.2%—wouldn't be affected under the White House proposal, and thus the cost of hiring new workers wouldn't be directly affected.
The plan would take the place of a $400-per-worker income-tax break that Mr. Obama included in the 2009 stimulus bill. That break, known as Making Work Pay, provides a tax credit of 6.2% on the first $6,450 of a worker's wages. It phases out for workers making more than $75,000.
The Making Work Pay program went little-noticed by many workers, according to lawmakers of both parties, in part because the small sum—$400 for individuals, $800 for couples—was distributed slowly over the course of a year, not given in a lump sum. Republicans might view the White House plan favorably because, unlike the Making Work Pay benefit, it wouldn't be available to people who make too little to pay taxes.
Lawmakers and administration officials also are considering a White House plan to encourage more investment in plant and equipment, by letting companies claim deductions on 100% of most kinds of investment.
A provision of the 2009 stimulus bill gave businesses the ability to deduct 50% of the cost of many types of property in the first year, and also allowed small businesses to fully expense amounts up to $250,000.
—Corey Boles and Martin Vaughan contributed to this article.Write to Jonathan Weisman at jonathan.weisman@wsj.com and John D. McKinnon atjohn.mckinnon@wsj.com
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